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Our current energy debates are always geared toward new energy sources. Meanwhile, we overlook that our current electrical distribution method wastes 70% of its electrical energy before it gets to its final destination . The next transformation in the energy world won't come from more sources, but from delivering energy in a more efficient manner.

The pioneer of this transformation is a manufacturer of micro turbines that could completely change the way we energize our lives. The question is whether this small-cap company will go out of business before it can revolutionize the way we produce energy.

We can build it; we have the technology ... but do we have the free cash flow?Capstone Turbine (NAS: CPST) , is the leading designer and manufacturer of co-generating micro turbines. The company designed a system built on small jet engines to create heat, hot water, air conditioning, and electricity on site that can potentially reduce total individual consumption of 40%. The addition of its air-lubrication technology results in a cleaner burn than traditional power generation and reduces nitrogen oxide emissions by 96%. These new developments could spur a move away from industrial distribution of electricity through the grid.

This is what the grid looks like today. At every transformation and transmission, we lose energy through heat. What a waste.

Source: U.S-Canada Power System Outage Task Force.

And this is what a decentralized system looks like. Look at how clean and efficient it is.

The second appealing aspect of Capstone's products is that they can consume a wide range of fuel types. Individual homeowners can choose from a wide variety of commercially available fuels -- natural gas, biogas, kerosene, jet fuel, or coal gas. For the more environmentally conscious, anyplace that can capture methane from the decomposition of organic material -- such as farms, landfills, and wastewater treatment facilities -- is now able to efficiently produce electricity. Turning our refuse into power. Now that is green thinking.

While some other big players, such as GE (NYS: GE) and United Technologies' (NYS: UTX) Pratt & Whitney, are also designing co-generation solutions , they do not have as strong of a product as Capstone when it comes to small-scale use. The smallest offering from Capstone is one that could fit the needs of a small home, whereas the competitors are built for hospitals and other larger buildings.

With a leading technology in what could be considered an emerging market, Capstone should be printing money. Alas, not even close.

While it looks pretty ugly, the numbers are slowly getting better each year. Based on these trends, it's possible that this long foray on the red side of the ledger could come to an end in fiscal 2013. Miraculously, despite all these losses, Capstone has been able to remain debt-free. The company did so, however, by raising capital through stock issuance -- not always the best news to hear as an investor.

The world of tomorrow ... waiting for people to open their walletsThis transformation will not be easy. Adapting this type of product requires heavy upfront switching costs, which can be hard to justify in a slow economic environment. Not all is doom and gloom, though. Capstone has been courting a friend in remote generation for oil and gas exploration. Big upstream oil and gas producers Chesapeake Energy (NYS: CHK) and EOG Reources (NYS: EOG) need to power their off-grid operations production at their Eagle Ford shale operations, and they are looking to Capstone to provide solutions . These deep-pocketed energy companies have ordered 150 generators for the shale play over the past year. Capstone has also just secured deals with Gentalta Power in Canada and with the Mexican government .

When considering Capstone as a potential investment, please take note that this stock currently trades around $1.00. The company has negative earnings, and therefore no P/E ratio. It's young and trying to find profitability -- so this could be a wild and bumpy ride for an investor. If you're willing to stomach some volatility, though, this stock could have some major upside potential.

If you're looking to get into the game in decentralized generation but are more averse to volatility, I would look to GE. The Motley Fool has produced a full premium report on GE that outlines its potential growth outlets and the potential risks in the future; click here for the full report.